LS3 - Restrictions On Free Trade

Question 1

Protectionism

Answer 1

Restricting free trade through trade barriers

Question 2

Free trade

Answer 2

International trade without restrictions or barriers

Question 3

Why use trade restrictions

Answer 3

National Security - country might prevent goods entering if it could pose a risk to national sec - might be during a war, or protect country’s security interests

Public Safety - some goods might pose a danger to public health, resulting in ban or restricting a good

Tax revenue - tariffs can be a important source of tax income to a country; adminstering tariffs is easier than other taxes; more useful for developing countries

Protect domestic industries - domestic firms can face more comp from foreign countries, as thye tend to be lower priced, so domestic firms go out of business/struggle - by using protectionism, such as tariffs, domestic firms can compete, protecting jobs

Retaliation - responding to country B’s trade barriers on country A, by imposing restrictions on country B - punish country B, convince it to remove its restrictions, serve as a warning to other countries

Preventing dumping

Question 4

Methods of protectionism

Answer 4

Tariff - tax on imports or exports (mostly imports)

Quota - limit on the num of imports entering a country

Subsidies for domestic producers - helps domestic firms compete by boosting growth

Embargo - ban on trade or other commercial activity with a particular country

Administrative barriers - country A might increase red tape and procedures involved in exporting good B to country A, so imports in country A are redcued. Red Tape is a short-hand term for unnecessary or excessively complicated regulations and administrative processes that have financial as well as opportunity costs for enterprises when complying with national and local laws and regulations and administrative processes.

Question 5

Impact of protectionism

Answer 5

Impact on producers - by receving govt support, domestic firms can become more competitive against foreign comp; but if support is given unconditionally, firms can become inefficient and fail to progress

Impact on consumers - trade barriers limit choice for consumers, make imports more expensive

Impact on workers - receive protection on jobs and wages; but if some industries use a lot of imported goods in their business, their costs will rise, profits will be harmed, firm may go out of business, loss of jobs

Impact on govts - for developing countries, tariffs can be a good source of tax income; for more developed countries, trade barriers can be used to win political support and protect industries deemed important; govts faced with opp costs in terms of protectionist measures